Germany ready to inject money into ailing banks

10th October 2008, 0 comments

After a day of punishing losses on stock markets, the Bundesbank president said there was no alternative but to act.

Washington -- Germany gave up its reluctance Friday over a broad-based bailout of banks, with its two most senior financial officials saying the financial crisis had grown too big for markets to put right.

"The downward spiral has gathered pace -- case by case answers are not going to help any more, even in Germany," said German Finance Minister Peer Steinbrueck as he arrived in Washington for weekend crisis talks with other Group of Seven (G-7) finance ministers.

Axel Weber, president of the German Bundesbank and a senior board member of the European Central Bank, said every nation now needed to give banks "help to help themselves, even in Germany."

He said options include "recapitalizing" banks with equity injections by the governments as Britain had done or the state temporarily taking blocks of shares in the banks.

After a day of punishing losses on stock markets, Weber said there was no alternative but to act.

But both men avoided the word "nationalization": They said the government would not seek voting control of the banks.

"The financial sector as a whole requires a solution of a stabilizing character," said Steinbrueck, offering few details of what he had in mind.

Germany has in the past week opposed a joint European Union bailout and has also suggested it would not need to nationalize financial institutions as the United States did with mortgage giants Freddie Mac and Fannie Mae or Britain did with Bradford & Bingley.

"If the market can't do it, the state has to be able to re-capitalize as a equity investor," said Weber. Weber said he would press for all the G-7 nations to act with "similarly structured approaches."

About half the German retail banking system is already state-run, with the federal and state governments either owning banks of their own or overseeing trustee savings banks and non-profit cooperative banks.

So far, Germany has only had to guarantee a single, 50-billion-euro (70-billion-dollar) bailout for a commercial mortgage lender, Hypo Real Estate, which is owned by shareholders.

German leaders have pointedly criticized deregulated financial markets in Britain and the United States and demanded action to bring markets under tighter rules.

In a speech Friday in Dresden, German Chancellor Angela Merkel said, "In this crisis, we have to see the opportunity to persuade those who have not been persuaded so far that rules have to be established."

Steinbrueck said he would also continue to advocate an eight-point plan that he unveiled in Berlin Sept. 25.

Ahead of the Saturday meeting in Washington, he offered finance ministers an English translation of the eight "traffic rules."

Among points in the eight-point plan is a call to put "innovative financial instruments" back onto bank balance sheets and increase bank liquidity "cushions."

Berlin also wants greater personal legal liability imposed on brokers and bank executives as well as changes to their pay incentives to stop them taking big risks to earn more.

In addition, Steinbrueck wants to stop banks packaging up mortgages and other loans as securities and selling these completely, eliminating all the banks' own risk.

In the plan, which has the status of Berlin government policy, he also said he wants regulatory authorities in the different countries to confer and work by standard rules.